In the last post, I introduced the fascinating idea that prices are information. And because information is dispersed in individual minds, local to the particular circumstances of time and place, prices become a miraculous mechanism by which those pieces of information are coordinated within a market.
I now have the great pleasure of elaborating on this idea by introducing a beautiful and wonderful short story. It is called “I, Pencil” by Leonard E. Reed. It indirectly illustrates in a simple yet profound way the miracle of prices. It is not long, and it is worth your time to read. A free version can be found here.
I would like to simply pull out of some of my favorite lines from that story to emphasize the miracle of prices and whet your appetite to read the full version. I will directly quote from the story, because the writing is so delightful it cannot be improved upon, and any attempt at summarizing in my own words would be fruitless.
“I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.”
“I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple. Simple? Yet, not a single person on the face of this earth knows how to make me.”
Below is a visualization of Reed’s detailed description of the many inputs necessary to create a simple No. 2 pencil:
“Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me…there isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how.”
“Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me…each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.”
“It has been said that “only God can make a tree.” Why do we agree with this? Isn’t it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!”
“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.”
“For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand—that is, in the absence of governmental or any other coercive masterminding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.”
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